Finance THE NOTION AND FUNCTIONS OF FINANCE Dr Katarzyna Sum Chair of International Finance Warsaw School of Economics

Finance Getting started Slides available at: Contact: Office hours: Monday 9.30 in Klub Jajko

Finance Final note  Multiple choice test  The scope of the exam- the syllabus available at

Finance Broad lecture outline  Public finance  Corporate finance  International finance  Behavioural finance

Finance Basic literature  R.W.Melicher, E.A.Norton, Introduction to Finance. Markets, Investments and Financial Management, John Wiley&Sons,2007;  A.Shleifer, Inefficient Markets, An Introduction to Behavioral Finance, Oxford University, 2000;  S.A.Ross,R.W.Westerfield, B.D.Jordan, Fundamentals of Corporate Finance, McGraw Hill Companies, N. York, 2006;

Finance The notion of finance  Finance- a part of economics concerned with the analysis of monetary flows  Finance as a process related to monetary flows

Finance Financial phenomenon vs. monetary phenomenon  Financial phenomena are related to monetary flows between the respective market players  Each financial phenomenon is a monetary phenomenon but not every monetary phenomenon is a financial phenomenon

Finance Examples of monetary and financial phenomenons  Financial phenomenon- the accumulation of savings, the purchase of goods or services  Monetary phenomenon- inflation, currency appreciation

The functions of money  Medium of exchange e.g. transactions  Unit of account- e.g. transaction valuation  Store of value e.g. investments and savings Finance

The functions of finance  Medium of allocation- investments and saving  Medium of distribution- e.g. transactions Finance

The classification of financial phenomena  Classification according to market players  Classification according to subject of monetary flows

Finance Classification according to market players  Monetary flows between:  Households  Public institutions  Insurance companies  Banks and other financial institutions  Companies

Finance Classification according to subject of monetary flows  Market monetary flows eg. payment of wages, payment for goods and services- shaped by demand and supply  Redistribution or transfer flows- eg. taxes, subsidies- shaped by legal acts  Credit flows- loans from banks  Savings- frozen monetary flows

Finance The financial system (1)  A set of legal regulations, principles and institutions, which are necessary for the right fulfilment of the functions of finance and their regulation

Finance The financial system (2)  Legal regulations- rules laid down in the economic and financial legal acts  Organisatory principles- resulting from economic theory and practice eg. the principle of budgetary equilibrium  Institutions, the activity of which is focused on finance eg. the ministry of finance, banks

Finance The financial system (3)  The budgetary system  The banking system  The insurance system  The corporate finance system  The household finance system

Finanse The financial market  Miejsce spotkania popytu i podaży produktów finansowych  Główne segmenty:  Rynek pieniężny  Rynek kapitałowy  Rynek walutowy  Rynek derywatów

Finanse The financial market  The aggregate of demand and supply of financial products  Main segments:  The money market  The capital market  The foreign exchange market  The derivatives market

Finance Financial policy  An element of the economic policy  Fiscal policy- the management of the public sector income and expenses (local and central government)  Monetary policy- stabilization of the purchasing power of domestic currency

Financial supervision  Banking supervision  Supervision of insurance companies  Pension system supervision  Capital market supervision  Centralized supervision (all functions are carried out by one institution) decentralized- many institutions Finance

Corporate finance  Ways of financing enterprises and ways of capital provision  Financial reporting  Financial analysis  Company vaulation

Finance Public finance  Public income and expenditure  Ways of financing the public finance sector  Deficit and public debt servicing

Finance Behavioural finance (1)  Financial processes viewed as a consequence of market participants behaviour  Abstracting from the classical finance assumptions i.e. from rational expectations and market effectiveness

Finance Behavioural finance(2)  Examples:  Financial markets modelling (taking into account speculative bubbles)  Valuation of equity securities e.g. taking into account various reactions of the investors  Exchange rate forecasting e.g. with risk premia  Explaining financial crises

Finance International finance (1)  Finance is international per se!  The functions of finance fullfilled internationally  International financial institutions: central banks, public institutions, private enterprises, banks, households which are active on international financial markets

Finance International finance(2)  The role of banks in servicing international financial transactions  International regulations of finance  National regulations, supranational regulation (EU), guidelines of international institutions (Basel Committee)

International money L. Oręziak, Euro nowy pieniądz, PWN, Warszawa Private transactions Official transactionsFunction Price quotationReference currencyUnit of account Transaction currencyIntervention currency Medium of exchange Investment currencyReserve currencyStore of value Finance

Literature  R.W.Melicher, E.A.Norton, Introduction to Finance. Markets, Investments and Financial Management, John Wiley&Sons,2007